Strategy Category: Forex

Trend Trading – A Long Term Strategy

Before you start any kind of trading, you need to build up your knowledge and experience, so you can do it as successfully as possible, minimising risk whenever you can. Trend trading is a strategy to use when you have built up that experience, and you should take the time to learn how to do it as effectively as you can. Many trading strategies can be learned by opening a demo account with a broker, and it’s worth doing a broker comparison to explore what might be best in terms of meeting your trading needs.

As opposed to the short-term strategy of range trading, trend trading is used when you want to take positions along a number of price movements and you decide whether you think those positions will move up or down. It’s possible to establish positions that could see larger price movements if the positions are held over a longer term, and it might prevent you from losses occurring from price “breakouts”. For trend trading, you need to identify a trend for the financial instrument you are planning to invest in and be confident that the trend will continue. You should be aware that trends can be reversed or suspended by changes in market sentiment or if there is a government intervention. There is always a risk in this type of investing, so you should also watch political and economic news sites to get a sense where financial matters could go.

Identifying Trends

Trends are usually marked on technical charts by a succession of trading ranges that may be higher or lower. The term ‘uptrend’ is used when a market makes a series of higher lows and higher highs, with ‘downtrend’ being a market where a series of lower lows or lower highs is made. Market conditions will determine how long these trends will continue, so they could last for days, weeks or months. It becomes doubly important when trend trading that you pay attention to what’s going on in the real world and work to identify the factors that may be driving trends in the long term for certain assets or currencies. There could be a number of these factors to take into account, and these include interest rate policies, inflation, national trade and investment balances, government policies or national production factors. A particular share price, for example, could be badly affected by the issuing of a profit warning or by a world leader criticising a specific company.

Following world events does not guarantee that your trading will be successful, but you may be able to spot a trend coming to an end before others do and act accordingly. You won’t always be able to identify exactly when a trend begins or ends, but you can try to get in early enough so that you can take a position ahead of the trend’s middle and then follow it up or down until it is completed.

Protecting Against Losses

There are many advanced tools for forecasting and analysing trends, but you can never be 100% certain about the future of a trend. If you have taken a position for a particular direction and the trend then changes direction, whether going up or down, you could stand to experience losses. To protect yourself against losses and to lock in profits, you can set stop-loss orders along the trend. When you take a position on a trend, you can set a stop-loss, a pre-set order to buy or sell a security when the price goes above or below a predetermined level. Effectively a stop-loss order is a type on insurance against losses, but you need to consider carefully the levels as which you set your stop-losses. Bear in mind that a price reversal can itself be reversed and if the reversal is only temporary your stop-loss could lock you out of gains. You could try using a percentage level of price movement to decide where you are content to set your stop-losses.

Predicting the absolute bottom or top of a trend can be hard, so you might want to consider accepting some small losses and assured gains rather than always trying to take the maximum profit by leaving a trade at a high or low point of a long-term price movement. You can use chart trend lines to try to identify when a trend reversal may have started and determine what your future strategy will be.

Understanding Technical Indicators

Before you start to trade, its worth doing a broker comparison to determine which trading platform you think will be most suitable for what you want to do.

Regression Channels: a regression channel is a type of price-channel and uses multiple time-frame analysis. This shows you where the trend bias, or the price trend, is going over a period of time. An algebraic formula is used, so a median price line can be determined and it’s likely that upper and lower support and resistance levels will go with that price line.

Moving Averages: one way you can spot a trend is by using a moving average. It’s measured by the closing price of ‘n’ periods, these being summed up and then divided by ‘n’. The 200-day moving average is one of the most common and represents around a year of price data.

Speculative Sentiment Index: this indicator is unique to specific trading platforms, so you will need to compare broker platforms if you want to use it. The SSI shows how strongly participants in the market feel about a particular asset’s trend at a specific time.

A demo account will help you pick up the technical aspects of dealing with different markets and many platforms have a range of technical indicators to help you with your trading that might help you to catch a trend more successfully than otherwise.

Originating in Japan back in the sixties, the Ichimoku indicator or trading system is a potent trading tool used to recognise buy and sell signals during the process of trading on charts. It plays [...]

Designed to create a more accurate picture for the ever-changing price trends in the market, the EMA or Exponential Moving Average is a trading strategy that proves to be immensely effective and he [...]

Additional Technical Indicators

Momentum Indicators: using momentum indicators involves you taking up long positions when a particular security trends with a strong momentum. The strategy also means that you would exit those positions when the security loses momentum. You may want to use the Relative Strength Index (RSI), which compares the size of recent losses or gains over a specific period of time, measuring the speed and change of a security’s price movement. RSI is mainly used to try to identify conditions that are oversold or overbought when an asset is traded.

Ichimoku Cloud: this is a cloud indicator and uses direction, volatility and momentum data to try to measure how strong a price trend is and indicate whether it is stable or getting weaker.

Traders often combine a number of technical indicators when planning their strategies and searching out trend trading opportunities. Whether you’re interested in short, intermediate or long-term trading, you will generally want to stay in your chosen position until you think the trend has reversed. There are always opportunities available, but you do need to build your experience with whichever trading platform you choose to guard against losing more than you gain. As you develop that knowledge by using a demo account, giving you as close to a real-life trading experience as you can get, you can learn about some additional technical indicators that might help you.

Trading Forex – Part 1

One of the most popular ways of trend trading is in the foreign exchange market, the largest and most liquid market in the world. It’s a decentralised global market and is where all the world’s currencies are traded. With an average daily trading volume that exceeds $5 trillion, it offers trading opportunities that are often not available with other types of investment. The Forex market is bigger than all the combined stock markets in the world, and though it can be complex to understand, there are some simple rules you can follow to ease you into your trading. If you’ve travelled abroad from the UK, you will be familiar with having to change your money into another currency. The exchange rate between those two currencies, for example pound sterling and US dollar, will determine how many dollars you get for your pounds. As exchange rates continuously fluctuate due to economic conditions and, at times, political pronouncements, you may get more or less than you expected, especially after the currency broker has taken its commission.

The basics of trading Forex are not complex, but how you decide to do it can be. If trend trading is an area you want to get into, then working the foreign currency markets could be your ideal solution. Currency is traded based on either where it’s headed or what you reckon its value is, and it’s not dissimilar to trading stocks.

Trading Forex – Part 2

The main difference between trading stocks and Forex is that with Forex you can trade up as well as down very easily. When you study the market, you can decide whether or not you think a currency will decrease or increase in value and sell or buy accordingly. As it’s a huge market, it’s a lot easier to find a seller when you want to buy or a buyer when you want to sell your investment. As an example, maybe you hear that a major country is going to devalue its currency with the plan to bring more foreign business into that country. If you think that this trend will continue, you could sell that country’s currency against another currency, perhaps the US dollar or the Euro.

The further the devaluing country’s currency goes down against the other currency you have chosen to trade in, the larger your profits are going to be. If you have an open sell position and the currency goes up in value, then you could have losses and should exit the trade as soon as you can. Forex trading is betting on one currency’s value against another, and when you are planning trades you will have a buy and a sell price, the difference between the two is called the spread. Depending on what you have to invest, your profit margins could be relatively small to start with, but you can also minimise your losses at this stage.

Conclusion:

How Safe is Trend Trading?

Any type of investing has risks, so before you start to get into it you should research information about its pros and cons and, where appropriate, take advice from a broker. There can be advantages to the strategy because it’s often the case that trends will repeat themselves, and if you study and understand trends you can, to some extent, look into the future. You also need to manage your risk and gauge if your position is a good one or whether you need to get out of it.

Disadvantages include the need to undertake a steep learning curve, so you know as far as possible how trends work and don’t get exposed to losses through inexperience. Remember also that history doesn’t always repeat itself, so trends can be deceptive. Though you could make good decisions much of the time, you should always be aware that there are risks and, as with any trading, there are times when you will take losses.

Types of Charts – Part 1

Before you move on to getting to grips with chart patterns, you need to know what types of charts there are that are used by traders and investors, in order to develop your trading strategies.

Line charts: These are the most basic sort of chart and represent solely the closing prices that relate to a set period. A line is formed that connects the closing prices over that set period, and though it doesn’t give that much insight into price movements within the day, there are many investors who think the closing price within a given period is more important than the opening, high or low price. Using a line chart can also make it easier for spotting trends because there is less happening on the chart in comparison to other chart types.

Bar charts: These charts expand on the line chart by adding the daily price range to the mix. You can then see the opening price, the high, the low and where it closes. A bar chart is made up of a sequence of vertical lines, representing the price range for a specific period. There is a horizontal dash on either side of the vertical, representing the opening and closing prices. The dash to the left side of the horizontal line is the opening price, with the closing price on the line’s right side.

There are four main types of charts, with line charts and bar charts being two of those, and what traders use will depend on what information they are looking for and what their desired goals are.

Types of Charts – Part 2

Let’s look at the other two main types of charts:

Candlestick charts: Over 300 years ago, this type of chart originated in Japan and is now very popular with traders and investors. In common with bar charts, candlestick charts have the same thin, vertical line that shows the price range for a specific period. The line is shaded in different colours depending on whether the traded stock ended higher or lower. The difference between these charts and bar charts is that there is a wider rectangular bar that shows the contrast between where the prices open and close. Typically, falling periods will have a black or red candlestick body, whereas a clear or white candlestick body denotes rising periods. If opening and closing prices don’t change and remain the same, there will not be a rectangle or wide body, making it easy to spot what’s happened, once you have gained experience of charts.

Point and Figure charts: Point and Figure charts have been around since the first technical traders began to invest in and test markets. These charts reflect price movements without needing to take into account volume or time concerns, so insignificant price movements can be removed. This “noise” can distort the view a trader has of an overall trend that can skew the effect that time has on analysing a chart.

It will be entirely dependent on each specific trader as to which chart they feel is going to be of most use to them.

Chart Patterns – Part 1

With millions of traders with different goals and experience trading every day in securities, and billions of dollars of trade being transacted, it’s effectively impossible to know what everyone’s motivations are. You can follow trends as best you can but you need technical tools to help you focus on the bigger picture. Chart patterns are the tools to help you identify trading signals and signs of future movements in price. Charts are based on the assumption that history repeats itself – though there are times when it doesn’t – but the assumption is that certain patterns constantly reappear and the tendency is that they will produce the same outcomes. There are established definitions and criteria for chart patterns but you’re not going to find any patterns that will give you 100% certainty as to where a particular security may be headed. Reversals and continuations are the two most popular chart patterns: reversals signal that a prior trend, when the pattern is competed, will reverse, whereas a continuation flags that the trend will carry on when the pattern is completed.

Though chart patterns are an important part of any trader’s technical analysis tools, you should look to combine them with other methods of technical analysis and with technical indicators. There are many types of chart patterns that you can use and it’s worth taking the time to get to understand the major types to see which will work best to give you a deeper understanding of the trading options.

Chart Patterns – Part 2

Here are some examples of chart patterns that you can go on to study in more detail:

Head and Shoulders: This is an example of a reversal chart pattern and indicates that once a trend has been completed, it is likely to reverse. The top of a Head and Shoulder has three peaks, with the middle one being the highest (the head) and the other two (the shoulders) being lower and about equal. A trend line, known as the neckline, connects the lows between these peaks, and this line depicts the key support level, so you might be able to detect a breakdown and reversal of trend. The bottom of a Head and Shoulders is the inverse of the top, and the neckline is a resistance level, so you can look out for a higher breakout.

Cup and Handle: The Cup and Handle is a continuation pattern that is shown when an upward trend is paused, but when the pattern is confirmed, will continue going up. The portion of the pattern that forms a cup should be in a “U” shape, depicting a rounded bowl, rather than a “V” shape. There should be equal highs on either side of the cup, and a handle forms to the cup’s right side, which is a short pullback and looks like a pennant or flag chart pattern. When the handle is completed, the security might breakout to new highs and then resume its trend even higher.

Originating in Japan back in the sixties, the Ichimoku indicator or trading system is a potent trading tool used to recognise buy and sell signals during the process of trading on charts. It plays [...]

Designed to create a more accurate picture for the ever-changing price trends in the market, the EMA or Exponential Moving Average is a trading strategy that proves to be immensely effective and he [...]

Chart Patterns – Part 3

Double Tops and Bottoms: Some chart patterns are considered by traders to be more reliable than others. The Double Top or Double Bottom pattern is one of these and is also easy to recognise. For traders who are technically orientated, these charts are a favourite tool. A pattern is formed when there has been a sustained trend and a support or resistance level has been tested twice by a price without a breakthrough. What the pattern signals is the beginning of a trend reversal that can happen over the intermediate or long term. As this pattern can give a useful and quick overview as to where a particular security is going or has been, it’s a useful tool, especially when you are starting out.

Triangles: These are another popular type of chart pattern that is used in technical analysis because they happen frequently when compared to other patterns. You may be familiar in maths with isosceles or equilateral triangles, but in chart patterns, there are three common types: symmetrical, ascending and descending. These can be short-term, up to two or so weeks, or can last for several months. Two trend lines converging towards each other are when symmetrical triangles happen, and though this is a signal that a breakout could occur, it does not indicate the direction of a breakout. An ascending triangle suggests that a higher breakout is likely, whereas a descending one may mean that a breakdown could occur.

Chart Patterns – Part 4

Flags and Pennants: These are short-term continuation patterns and they represent a consolidation after a sharp price movement, and a prevailing trend then continues. These are useful when examining patterns in trading. When you look at this type of chart, you will note flags that look like a small rectangular pattern, and these slope against a prevailing trend, with pennants being small, symmetrical triangles. The length of the “flagpole” determines the short-term price target when a flag and pennant pattern is examined and they typically last for only a few weeks.

Wedges: A wedge pattern is a reversal, though it can, on occasion, be a continuation pattern. It’s similar to a symmetrical triangle but it slants downward or upward. A rising wedge happens when a trend is moving higher, prices are converging and there is a loss of momentum with the prevailing trend. A falling wedge happens when a trend is heading lower when processes are converging, signalling that the bearish trend’s momentum is being lost and it is likely there will be a reversal. It’s not the easiest of patterns to identify, so if you choose to use it, you should also consult other technical indicators that may or may not confirm the information.

Gaps: Gaps happen when there is a significant decrease or increase in price that creates an empty space between two periods of trading.

Market Trading with Patterns

You can use patterns in trading with whichever market you want to work in, and if you are developing a portfolio of investments, you can find those that best suit your trading instincts. If you are starting out, the best way is to sign up for a demo account with a broker – always do a broker comparison first to see what costs and other requirements are – so you can learn the ropes before investing your own money in trades. Whether you’re looking for quick profits or for longer-term investments, such as for retirement or to buy a property in the future, you should take plenty of time to acquire the knowledge and skills that will help you navigate the complex financial world.

You may want to go into commodities, seeing where prices for the likes of oil, natural gas, renewable energy, steel, aluminium or agricultural products have been and are going. The price of commodities, as with all securities, fluctuates due to market conditions and can be very responsive to political decisions, such as putting on tariffs for imports. Keeping an eye on economic and political news can help you determine what commodities, currencies, stocks or other tradable items might be a good place for your investment.

Conclusion:

Patterns in Trading – A Useful Tool?

Put simply, the answer is yes, but patterns are only one set of technical tools you can use to trade successfully. However, because there are so many types of charts, if you can get through how all of them work and blend what works for you into your trading strategies, they can provide a high level of support and information to back up your own inclinations. Whatever field you decide to trade in, you should use all the tools available to give you the best opportunities for success.

When you understand what types of charts you can use and then how you can decipher patterns, you are in a strong position to invest with confidence. No trading is without risk, so learn the business with a demo account before stepping into the maelstrom of the markets. Time spent practising, understanding patterns and other indicators, could set you up to become a successful trader.

Breakout Elements

Volatility: Increased market participation heightens volatility, so if there is heavy selling or buying, the market conditions may become unstable. This results in the creation of market fluctuations that are larger than expected, so as that market volatility increases, there is a higher probability of a strong trend developing.

Market participation: A breakout’s common characteristic is a spike in volume: the number of shares of a particular commodity or stock that changes hands. When the price of security leaves the market’s normal constraints, a debate over how much it is worth hots up, so that participants in the market are encouraged into opening short and long positions to try to make a profit from what they perceive to be an opportunity.

Price move direction: When volatility is heightened and there is increased participation in the market, the result may be a noticeable directional move of the price. It’s a breakout’s defining characteristic and if there is not a definitive price move there is no breakout.

When a price on a particular market moves suddenly in one direction or another, it’s called a breakout. That move goes beyond that market’s current trading range, exceeding levels of resistance and support that have been established, and can happen very quickly, with substantial momentum. There are a number of unique varieties of breakouts but there are several key elements that they typically include. Three of these are mentioned above.

Identifying a Breakout – Part 1

You need each element of a breakout to be present, knowing that greater market participation will lead to volatility and thus be a catalyst for the trend. A breakout can happen in any market, as long as the conditions are right. Forex, futures and equities markets are often used for breakout trading and though it can be difficult to catch a breakout, if you do it at the right time, you have an opportunity to take substantial profits, and if the strategy works, mitigate some types of risk.

Chart patterns (1): These are a popular way of identifying breakout scenarios. In technical analysis, a flag is a chart pattern illustrating a temporary pause in the action of a directional price, and suggests that the price may resume its movement in line with a trend that had been previously defined. A chart pattern that has a triangle shape is a pennant, and the pattern is formed when a price action is consolidated when there has been a directional market trend or move. Pennants act as a signal that there will merely be a pause in the market and it’s likely that the trend preceding it could extend its range relatively soon.

There are a number of ways you can recognise opportunities when you use a breakout trading methodology, and identifying such a scenario could be rooted in technical analysis or fundamental analysis of the market trends.

Identifying a Breakout – Part 2

Chart patterns (2): Candlesticks are used in forex trading and the formations give some detail as to how the emotions traders have may affect the price movements of particular securities or specific currency pairs. Candlestick charts are preferred by many traders, as they are visually appealing and can give a lot of information in a relatively small amount of space.

Support and resistance: Levels of support and resistance develop over time, with price testing key areas before coming back under control. When these support and resistance levels are established, they are considered to be price constraints, so the market is effectively contained. You can look at support and resistance from the perspective of traditional market fundamentals or in terms of technical analysis. Examples include moving averages that help you to evaluate a currency pair’s price history of a related investment, and pivot points that give information to help you decide when to go into or come out of positions you’ve taken.

Market consolidation: A market that is consolidating is sometimes considered to be in a stage of indecision and could be a precursor to a pricing move. When a security’s trading range gets tighter, it’s quite usual for volumes to decrease, and when extremes of the range become compromised, prices can be driven up or down.

News releases: You should monitor economic news and market-related data to see if anything released could cause a move in pricing.

Pros of Breakout Trading Part 1

When considering developing skills in breakout trading, remember that if you do your research and practice well, you can turn a profit, although inevitably, you may also incur losses. All types of traders try to capture breakouts using analysis techniques that are based on different timeframes. Whether you’re a scalper, deciding to take small profits quickly when they become available in the marketplace, an intermediate-term investor, or a day or swing trader, you need to develop a deep understanding of how breakout trading works. Your main objective is to make a profit when there is a directional move in pricing.

Limiting the risk: On many occasions when market phases are consolidating, breakout trades can be an option to pursue. There may be relatively small initial stop losses and that will depend on the price range or compressional pattern that’s used to enter the market. You could also get a rapid confirmation of a trade failing and take a quick exit if things downturn.

There are, as with all trading strategies, advantages and disadvantages that are distinctive to breakout trading, and many factors to take into account that may contribute to the success or failures of a specific trade in this field. You should research a comprehensive breakout trading guide to decide whether it’s the right trading method for you, and be aware that there are both supporters and detractors of this way of trading.

Originating in Japan back in the sixties, the Ichimoku indicator or trading system is a potent trading tool used to recognise buy and sell signals during the process of trading on charts. It plays [...]

Designed to create a more accurate picture for the ever-changing price trends in the market, the EMA or Exponential Moving Average is a trading strategy that proves to be immensely effective and he [...]

Pros of Breakout Trading Part 2

Potential for profit: Profit is the motive for any kind of trading and you can be as cautious or adventurous as you like – whatever suits your risk appetite. When a breakout trade is successful, it’s possible to make large gains in a relatively short period of time. If you identify and then get into a strong trend, you have the opportunity, if you play your position well, to make a good profit.

Managing the trade: You can manage your trades effectively as there are usually market entry and exit points that are predefined. With the identification of profit targets and stop losses before the trade starts, you can eliminate, as far as possible, subjectivity mistakes in terms of managing an open position.

Success or failure in breakout trading can often rest on small margins of actions taken, and setting up the right trading platform is an important part of working to get a positive outcome for your efforts. It’s sensible to do a broker comparison to find the best trading platform for what you want, and if you have no experience in any type of trading, consider opening a demo account with the broker of your choice. You’ll get plenty of online advice, taking you through the various steps to trading, whatever market you choose to go for, and the benefit is that you use virtual money until you are ready to use your own resources to buy into markets.

Cons of Breakout Trading

There are always risks to any type of trading, and brokers will warn you that when you invest in any trade, you are in danger of losing your capital. This is why you need to do your research before signing up with any broker. The vast majority of those involved in helping people to invest are regulated by the appropriate authority in their country, but there have been many stories of people being scammed by individuals or so-called investment firms that are criminal operations. The key to keeping safe when investing in anything is to do your homework and check a broker’s experience, testimonials and results for investors.

False breakouts: Breakout trading, whatever the indicators you use to try to anticipate trends, is largely subjective. The methodology you use to identify a breakout may be sound but it’s hard to quantify the follow-through of the market. You may find a signal that appears to be solid but if the increased market participation, for whatever reason, doesn’t happen, then your breakout position may well not be successful.

Opportunity cost: If you’re always looking for optimal trade setups, which can occur infrequently, you could be sidelining yourself by not leaving yourself options to go after other trading opportunities. You should never concentrate on one type of trading at the expense of other possibilities.

There are potential downsides to breakout trading and some traders think it’s not the most efficient way of getting involved with financial markets.

Trading Forex for Breakout

The foreign exchange market – Forex – is the world’s biggest market and also its most liquid. The market is decentralised and currencies from across the world are traded on it. If you want to consider breakout trading on the forex market, you need to have a clear understanding of exactly how the market works before taking any kind of position in it.

The market can appear to be deceptively simple at first glance. The basics are that currencies are traded against each other in the form of pairs. A currency can be paired with any other currency but there are several standard and popular ones that traders always keep an eye on. When a currency is paired against another, the bottom line for trading is betting on whether one of the currencies will increase or decrease in value against the other, either over a short period of time or in a longer-term scenario. The market can be very volatile and is often at the whim of political or economic announcements. If, for example, a set of bad trading figures comes out for the UK, it’s likely that the pound sterling will drop in value against other major currencies, so if you want to trade successfully, you need to follow trends as well as keep up with world economic and political news.

Conclusion:

Is Breakout Trading Worth Doing?

As with any style of trading, you can make significant profits by using breakout as your template, but you can also make considerable losses if your planning and understanding of the markets aren’t up to scratch. Identifying a breakout trend is not easy, so you need to ensure that you use the best technical indicators to support your own trading instincts. When you detect there is likely to be a surge on a particular currency, you naturally want to take advantage of it, and it’s easy to get emotionally involved as you hope to make a lot of money. You need to remember that many breakouts that seem to a good bet for trading will quickly revert to range, so you need to be ready to exit your position quickly if it seems that you are going to make losses. Keep a calm head when doing any form of trading and work to lessen the inevitable risks.

What is Gap Trading?

Gap trading is an approach to buying and shorting stocks that is simple as well as disciplined. You search for stocks that have a price gap from the previous close, then you watch the first hour of trading to establish the trading range. If the shares rise above that range, this is a signal for you to buy, if it falls below that’s a signal for short.

A gap is defined as a change in price levels between the close and open of two consecutive days. In fact, many technical analysis manuals define four types of gap patterns:

Common

Breakaway

Continuation

Exhaustion

However, it’s important to remember that these labels are applied after the chart pattern is identified. This means that the difference between any one kind of gap from another is only evident after the stock continues up or down in some way. These classifications are useful to traders seeking a longer-term understanding of how a stock or sector performs and reacts; however, they offer little guidance for trading.

Many brokers develop their own set of terms when describing gaps so that you may come across, for example, a full gap up, a full gap down, a partial gap up, or a partial gap down.

The Characteristics of Gaps: The Breakaway Gap

You will soon find that gaps are a common occurrence in the markets, as there is always at least one stock, if not more, that has gapped up or down when the market opens. This occurs because when an event happens somewhere between the market close the previous day and the opening of the market the next day, there will be gaps. Even as the markets eventually move step by step towards a 24-hour format, there will still be gaps. Across the globe, you can be sure that there will be some event happening over the weekends. Additionally, sometimes a group of investors get excited and make a big deal out of something, even when the reason is not always apparent. As gaps are here to stay, the best response is to take them in stride and learn how to profit from them.

Let’s look at the breakaway gap in a bit more detail. Breakaway gaps are a little more challenging to manage than other types because when the gap occurs It can be trickier to estimate which way it’s going. For instance, when a stock has been in a consolidation stage, it often breaks out with an opening gap rather than making a standard market session move. Usually, the gap will open in the same direction as before the consolidation stage, however, this is by no means guaranteed.

Runaway Gaps and Exhaustion Gaps

Runaway gaps appear when a stock has been trending for some time. You can spot them as, instead of moving up as usual during market hours, they open with a gap that continues the dominant trend.
This demonstrates there is more interest in the stock. It may be that some positive news has boosted investors’ incentive to own it. Runaway gaps are sometimes also called measuring gaps because they are often used as a central point of measurement between the beginning of the trend to the gap, and then from the other side of the gap to predict the next likely level it would reach.

Exhaustion gaps occur when the market has been trending for an extended period, generally after a bull market, when prices are rising, or a bear market, when prices are falling that has lasted for a few years. Exhaustion gaps trigger a slowing down of the trend or a period of consolidation. Gap traders need to be careful not to confuse an exhaustion gap with a breakaway gap as they can have a similar impact at first. The trick is to look at where they are appearing; an up gap will surface in the market tops and a down gap in the market bottoms if this is an exhaustion gap. Breakaways, on the other hand, appear as up gaps in market bottoms and down gaps on market tops. Breakaway gaps often result from consolidations.

Best Markets for Gap Trading

Generally, you can use gap trading in any market, including stocks. The trick is to choose the most predictable markets and watch them carefully. You don’t need to use any indicators unless you want to, and you’ll easily find a market that has a price gap between the previous day’s close and today’s open. In most cases, prices tend to move in the direction of the last close, so your opportunities for trading are excellent.

Remember to focus on the day session of the markets and to exclude the overnight session. Of all types of trading strategies, the odds tend to be in your favour when trading gaps although it’s worth bearing in mind that past trends do not necessarily translate into future performance. A key aim is to try to avoid the majority of the losers, as opposed to trying to catch all the winners.

As you don’t need indicators or other sophisticated tools, you can use charting software to plan all your trades. In the forex market, the EUR/USD pair is the most commonly traded no matter which trading strategy you are using. That’s because this major pair benefits from liquidity and is able to withstand shocks to the markets better than other currencies.

Originating in Japan back in the sixties, the Ichimoku indicator or trading system is a potent trading tool used to recognise buy and sell signals during the process of trading on charts. It plays [...]

Designed to create a more accurate picture for the ever-changing price trends in the market, the EMA or Exponential Moving Average is a trading strategy that proves to be immensely effective and he [...]

Best Techniques and Tactics for Forex Gap Trading

Use stop losses when forex gap trading, especially on weekends, and make sure they are adaptive to any recent market volatility, higher volatility is equal to wider stops. You can measure volatility in the forex markets using the ATR (Average True Range) indicator. If you opt to trade forex gaps, it’s best to use wide stop loss orders. This is because there can be significant negative deviation before the gap closes, and sometimes not all gaps are filled. If you enjoy the challenge of weekend gap trading, you should learn to reduce your position sizes accordingly to accommodate the wider exit point. Wider stop losses are better because they can adapt to volatility in the market. If you want to measure volatility, the Average True Range (ATR) indicator may be useful. Bear in mind that the tighter your stop, the more likely it is that you will be stopped out and generate a loss.

For weekend gaps, focus on those major currencies that are most liquid, for example:

EUR/USD

GBP/USD

USD/JPY

You could possibly increase your winning percentage by using profit taking targets at percentages of a gap being closed. For instance, some traders opt to exit half their position at about 50% closing of a gap with the remaining position grabbing an opportunity for a full gap close. Always pay attention to bid/offer spreads which can become very wide during the Sunday evening opening period.

Alternative Trading Strategies

Before adopting any trading strategy, you know it makes sense to look around to see what other alternatives are available. For this reason, before making a final decision about gap trading, you may wish to consider some of the alternatives. Position trading is sometimes described as a buy and hold strategy rather than active trading. You’ll find that this is because it involves the use of a number of methods to determine trends, including longer term charts. Position trading may last from several days to several weeks, or sometimes even longer.

Swing trading focuses on using technical analysis to look for stocks and short-term price momentum. Sometimes, swing traders utilise the essential or core value of stocks and they also analyse trends and price patterns. Scalping involves speedy trades on small movements in price in a single day in order to collect a large number of small gains, gathering them together for a healthy profit. It’s considered safe by many traders because risk exposure is limited. Investors also use breakout trading in order to limit risk levels. They do this by taking a position within the early stages of a trend. You can consider this trading strategy as the starting point for any significant price moves and can also signal expansions in volatility.

Tips for Choosing Your Broker

If you’re serious about gap trading as a strategy, you will want to consider which online brokers will suit you best, as having the best stock broker to serve your individual needs is very important for every investor. It may be that you’re attracted by cheap trades, for example, however you should remember that these often come at the expense of fewer research tools and a very simplified or cumbersome trading platform. Check up on these points before you commit:

Available trading tools and investment options

Banking and account security

Retirement accounts and account minimums

Speed & order execution and international trading

The level of trade commissions and other fees

The quality of market research and customer service

Investigating these features of potential brokers should highlight any areas of concern, as well as any functions that a particular broker does well. Some stockbrokers are specialists in specific areas, such as day trading or options trading, so it’s best to check these out in advance.

For day trading, which is of interest if you like to use a scalping or a gap trading strategy, there are particular facilities to which you will want to pay attention. These include the costs and expenses of trading, even if you are a high-volume trader your gains may not always exceed commission costs. Look for a broker that offers special rates for day traders if you are highly active.

Conclusion:

Is Gap Trading the Right Strategy for you?

Gap trading is a precise and disciplined strategy, so if you want to engage with it, you will have to be sure you have a suitable temperament. Vigilance is key and the ability to understand charting and recognise different types of gaps is essential. You will need to take time out to monitor trades before opening a position and to keep a careful watch as time passes. When you fully understand the characteristics of different kinds of gaps you can learn how to navigate them to achieve the best result.

You can use gap trading on any kind of stock and also on the forex markets if you prefer currency trading. In the latter case, it’s safest to stick with the major currency pairs which have the greatest fluidity. It’s always best to check out a range of different trading strategies before deciding on one you prefer, so use demo accounts available from your broker to try your hand at different techniques. Take the time to check out your broker’s track record, especially the costs and expenses you might incur, as this is what will make the difference when it comes to profits or losses.

What is Scalping?

As a trading strategy, scalping aims to collect profits made on minor price changes. As a trader implementing this strategy, you might place, for example, anywhere from 10 to several hundred trades in one day. Most traders agree that often smaller moves in stock prices are easier to anticipate than larger ones. Scalpers know that before too long many more modest profits are likely to combine to become larger gains, providing they put in place a strict exit strategy to prevent large losses.

Scalping makes use of larger position sizes in order to make smaller price gains in the shortest period of holding time. You carry out scalping strategies in a single day and they are relatively easy to understand and to operate. The scalper’s goal is to buy or sell a number of shares at the bid/ask price, then to sell or buy them at a slightly higher or lower price for a profit. Holding times may vary from seconds to minutes, and in some cases a position may be held for up to several hours. However, the position is closed before the total market trading session ends, which can extend to 8 pm EST, which is 1 am the following day in the UK. The scalping trading strategy aims to either buy low and sell high, or buy high and sell higher: also, to short high and cover low, or short low and cover lower.

The Characteristics of Scalping

Scalping is characterised by extremely fast-paced trading activity, ideal for the most agile traders as it requires both exact execution and precise timing. If you are trading via scalping, you can make use of day trading buying power, four to one margin, in order to maximise your profits via trading the most shares in the shortest amount of holding time. You need to be clear that scalping is firmly based on technical analysis and short-term fluctuations in price.

This means you will need to focus on the smaller time frame interval charts, momentum indicators and price charge indicators. So, your preferred tools, resources and instruments are therefore likely to include:

One-minute and five-minute candlestick charts

Stochastic (for random changes in financial markets)

Moving average convergence divergence (MACD)

Relative strength index (RSI)

Moving averages

Bollinger bands

Pivot points

You will quickly find that scalping is sometimes considered a high-risk style of trading, due to the extensive use of leverage. Given the typical features of this type of trading, a trader that executes four or more ‘day trades’ within a period of five business days is known as a Pattern Day Trader (PDT). Be aware that the equity in an account required for a PDT is higher than that required for a trader who is not a PDT.

Engaging in Forex Scalping

Despite those who consider scalping to be a high-risk trading style, forex scalping remains popular because it is often perceived as a safe strategy. This is because it involves the quick opening and closing of positions. Some scalpers maintain their position for only about one minute, whereas others may use a timeframe of between three and five minutes.

You may opt for scalping because you know that these short time periods reduce your exposure to the risk of incurring large losses, compared to other traders. However, bear in mind that forex scalping is not a suitable strategy for every type of trader. For instance, if you are an impulsive individual, who gets excited at the huge potential of trades or wants instant gratification, you will most likely find scalping is frustrating and possibly also boring. Scalpers need to have patience and diligence and to focus on making small returns, albeit a great deal of them, so that combined they amount to a significant gain.

Scalping is also a time-consuming trading strategy in comparison to some others. Due to the frequent opening and closing of trades on a particular day, as a scalper you need to remain vigilant and avoid becoming negligent. In essence, you need to develop your trading habits and practices to handle the volume of short term trades comfortably. As long as you develop your skills in this respect and remain attentive, you may find you enjoy scalping and can do it successfully.

Best Currencies to Trade in Forex Scalping

Generally, forex scalping benefits from making good use of currencies that are not liable to very sudden movements in any direction. When such movements do happen, it’s better that these only occur occasionally. For these reasons, major currency pairs are considered to be the favourites, particularly EUR/USD, GBP/USD and USD/CHF. The Japanese Yen (JPY) pairs are also within the major pairs arena, however they operate differently and are often considered to be in a separate category, such as carry pairs. The chief categories of currency pairs are:

Majors

Carry pairs

Exotic currencies

In fact, the EUR/USD pair is the most commonly traded major pair, no matter which trading strategy you decide to use. It makes sense that any factors that influence either economy will affect the pair, as will the differential between the interest rates at the European Central Bank (ECB) and the Federal Reserve (Fed). There are also strong mutual connections with other currency pairs. For example, close economic ties between the Euro and the Swiss franc or the British pound creates a positive correlation with EUR/USD; whereas there tends to be a negative correlation against USD/CHF.

The main characteristic of major pairs is liquidity, plus a secondary property of being able to better withstand market shocks. For instance, a significant event that may cause a 100-pip movement in a currency pair such as the Australian Dollar/Japanese Yen (AUD/JPY) may move the EUR/USD pair by only 30 points or less.

Originating in Japan back in the sixties, the Ichimoku indicator or trading system is a potent trading tool used to recognise buy and sell signals during the process of trading on charts. It plays [...]

Designed to create a more accurate picture for the ever-changing price trends in the market, the EMA or Exponential Moving Average is a trading strategy that proves to be immensely effective and he [...]

Best Brokers for Scalping

It has to be said that some forex brokers don’t support scalping as a trading strategy. Having said that, there are plenty of online currency trading brokers that do actually specialise in and allow scalping and they will not get in the way of the trading strategies you prefer to use, even if this involves opening a number of trading positions during relatively short time periods.

Generally, it’s best to seek out companies with no trading restrictions and you can find listings of many of these brokers online. In the main, they are not deterred by a deal that is opened for a matter of seconds with tight stop losses. Some of the principal brokers include:

FXTM

Fibogroup

FxPro

XM

Admiral Markets

FBX

It’s important to take note of any additional features that may be attached to the general terms and conditions of those brokers who do allow scalping. Also, it’s a good idea to catch up on reviews and comparisons of individual brokers that are published online, as these can offer a good steer when you’re trying to decide on which broker may be right for you. You may find, for instance, that you’re already with a broker that will be fine should you choose to change your trading strategy from a more traditional one to scalping. Additionally, you also have the option of seeking out a direct-access broker.

Alternative Trading Strategies

Before adopting any trading strategy, you should look around to see what others are available. For this reason, before making a final decision about scalping you may wish to consider some of the alternatives.

Take swing trading, for example: the main objective is to capture gains in a financial instrument or in a stock within an overnight hold to several weeks. Using technical analysis, swing traders look for short term price momentum and stocks. Sometimes they utilise the intrinsic or fundamental value of stocks and also analyse price patterns and trends. Investors use breakout trading in order to take a position within a trend’s early stages. This trading strategy can be viewed as the starting point for any major price moves and can also signal expansions in volatility. If you manage it well, it can limit risk levels.

Gap trading is generally regarded as a fairly disciplined, yet simple approach to buying and shorting stocks. As a trader, you find stocks that have a price gap compared to the previous close and you watch the first hour of trading in order to identify the trading range. A rise above that range signals a buy, and a fall below it signals a short. Position trading is sometimes described as a buy and hold strategy rather than active trading. This is because it involves the use of longer term charts plus other methods to determine trends. It may last from several days to several weeks, or even longer.

Using a Direct Access Broker

If you’re serious about scalping as a trading strategy you may want to consider working with a direct-access broker. This is a broker that concentrates on speed and order execution. Normally, a traditional broker mainly focuses on undertaking investment research and providing advice. A direct access broker, on the other hand, will usually have access to complex computer software that will allow you, as a client, to trade directly with an exchange or with other individuals using electronic communication networks (ECN).

Direct access brokers often charge a lower commission than full service brokers. They can do this because they effectively eliminate any third party, thereby reducing their own costs. They have become popular mainly because of their fast transaction times, but also because of the other facilities they offer. These include:

Interactive charts

Streaming quotes

Level II Nasdaq quotes

Other real-time features

Traditional online brokers tend to cater to retail swing traders and self-directed investors. Their platforms tend to prioritise research and functions to provide market analysis rather than focusing on execution services only. Client trade orders are pushed to a centralised trading desk, which then re-routes them to the company’s own market makers. Alternatively, trades may be sent to other liquidity providers via order flow arrangements that have previously been negotiated.

Conclusion:

Is Scalping for You?

Scalping is a popular strategy because the speed of executions means you are not exposed to the fortunes of the market for very long. Fast transactions on small price changes limit your risk, and a lot of small gains in a single day can soon amount to a large profit, when combined. Scalping requires a trader to be agile and to closely monitor all trades, taking rapid action as soon as this is necessary. For this reason, it’s a time-consuming activity.

Technical analysis plays a major role in scalping, so as a trader you will need to be familiar with the various charts and other tools required to effectively monitor price movements and market changes. You will also need to be disciplined in terms of your exit strategy, which can mean sacrificing larger gains on occasion. Not every broker permits scalping, so if you decide to opt for this strategy you will need to find a broker that supports it, perhaps a direct access broker rather than a conventional one.

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Trading financial products carries a high risk to your capital, especially trading leverage products such as CFDs. They may not be suitable for everyone. Please make sure that you fully understand the risks. You should consider whether you can afford to take the risk of losing your money.